Reduced FHA Premiums Likely to Boost Mortgage Activity

house keyMortgage originators and other housing industry leaders are optimistic about a newly announced reduction in insurance premiums carried by FHA home loans. The change, they say, is likely to boost borrower interest in a program that has seen somewhat of a decline in recent years. Furthermore, the planned cut could allow more first-time and moderate-income borrowers to buy a home or refinance their existing mortgage.

The White House made the official announcement Wednesday, Jan. 7, in which it ordered a 0.5 percentage point cut in FHA premiums, lowering the annual rate from 1.35 percent to 0.85 percent. In a follow up speech, President Barack Obama explained some of the benefits of the cut.

“The FHA will lower its mortgage insurance premium rates enough to save the average borrower more than $900 per year,” Obama said. He also added that millions of homeowners would save money on mortgage payments in the coming three years.

How mortgage professionals have responded

The reaction to the announcement has been largely positive, with the mortgage industry cheering the move, particularly mortgage originators. Most mortgage originators expect to see higher levels of mortgage activity due to the fact that the cut will allow the FHA to compete with the new 97 percent loan-to-value programs from Fannie Mae and Freddie Mac.

Fannie and Freddie’s 3 percent down conventional purchase loans had been attractive options for many borrowers, but now mortgage industry experts say the FHA is back in the game, stronger than ever.

How borrowers will benefit

At the current FHA premium rate of 1.35 percent, the program was considered unaffordable to many lower-income buyers, leaving them nowhere to turn for a home loan. Those with less-than-perfect credit scores were at an even greater disadvantage, as the credit requirements for conventional mortgage programs was out of their reach.

Now, with the change set to take place at the end of January, not only will the program be attainable and more affordable for more borrowers, but it will also create a positive impact on the housing market as a whole, which has struggled to get first time buyers back in the market.

What will not change

One FHA loan feature that will remain in effect is the life-of-loan insurance requirement. This policy, issued in 2013, requires most FHA borrowers to carry mortgage insurance for the entire life of the loan.

In a January 2013 Housing Wire article, FHA Commissioner Carol Galante said the life-of-loan insurance requirement was necessary in order to protect the Mutual Mortgage Insurance (MMI) Fund.

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs,” Galante told Housing Wire last year, adding that the rule “will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”

Although the life-of-loan insurance requirement will remain in effect, the rate hikes that were announced during the same time two years ago will now be reversed, thanks to the new policy. Now, with FHA premiums reduced, mortgage rates remaining near historic lows, and economic conditions improving across the nation, 2015 could very well be the year of the FHA loan.

To learn more about FHA home financing, contact one of our branches or call our toll free number: (866) 544-7013

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